Cyient: Margin improvement has upside risks

14 Jun 2023 , 11:40 AM

Recommendation: Buy; Target Price: Rs 1600

 

Analysts of IIFL Capital Services met with Krishna Bodanapu, Executive Vice Chairman & MD, Cyient (CYL) to understand the overall outlook for the company. He reiterated confidence in delivering Services FY24 revenue growth of 15-20% cc YoY (9-14% cc YoY organic), despite the ongoing macro challenges. Within verticals, Transportation, Sustainability and New Growth areas are likely to lead growth. CYL has undertaken multiple initiatives over the last couple of quarters to cut costs. Analysts of IIFL Capital Services believe the full impact of these initiatives combined with the full-year contribution of higher margin acquisitions and prudent wage hikes should lead to FY24 margin improvement at the higher end of its guided range of 100-200bps. Analysts of IIFL Capital Services raise their FY24-26 EPS estimates by up to 7% primarily, on the back of higher margin estimates, making us 5-13% above Bloomberg EPS consensus estimates. Their 12-month TP increases to Rs1,600 (was Rs1,280) based on 18x (was 16x) 2YF EPS estimates and reiterate our BUY rating. 

Demand momentum remains healthy: 

CYL continues to see healthy demand across its key verticals Aerospace (driven by digital MRO opportunity), Sustainability (driven by global energy transition) and New growth areas (driven by Auto and Semicon). Connectivity could see some softness in near term due to the capex-intensive nature amid rising interest rates. Sequential growth in Q1 could be impacted by the high base, but should accelerate from Q3 onwards.

Extent of margin improvement could surprise: 

CYL’s initiatives over the last couple of quarters like real estate consolidation, automation, rationalising sub-contractor costs and better utilisation of resources are likely to lead to margin improvement in FY24. Analysts of IIFL Capital Services believe the quantum of margin improvement is likely to be at the higher end of its guided range of 100-200bps for FY24, leading to consensus earning upgrades.

Valuation sustainable; BUY: 

Despite the stock being up ~75% YTD vs Nifty IT index flat, we believe the current multiples are sustainable given the sharp improvement in both revenues and margins. Analysts of IIFL Capital Services forecast CYL to deliver EPS Cagr of 27% over FY23-25 and are 5-13% above Bloomberg consensus FY24-26 EPS estimates. Potential DLM restructuring could further unlock shareholder value. Risks: M&A, delay in DLM IPO.